Question

15. Use golden rule in the Solow growth framework to analyze the following three facts about the US economy, and discuss whether the US is over (or under) accumulating capital.
    1. The US capital stock is about 1.6 times of one year’s GDP;
    2. about 10% of GDP is used to replace depreciating capital;
    3. the return to capital is about 25% of US GDP.

Answer 1

The Solow growth model shows how interest rates and investment levels determine a stable equilibrium between capital and income. By setting the saving rate, the steady state of the economy can be determined. This constant state is called a golden rule of capital, which can optimize the level of workers' consumption.
US Capital stock: The US production and national output levels as a developed economy are very high compared to the rest of the world. The overall output and economic development can be boosted by ensuring capital efficiency. The US economy is therefore concentrated more on its stock of capital.
Capital depreciation: 10% of US GDP was spent on substitution of production units' costs. Economics is increasing daily with new technologies or inventions. Development can therefore be sustained by making capital and its stock proper and efficient.
Capital return: returns from capital that is used for investment by others. Investment therefore promotes overall production and GDP. Highly skilled laborers develop large amounts of equipment for capital or machinery. These specialties can improve overall development in comparison with other economies.
The living standards of people also increased with this higher preference given to consumption. The pattern of consumption shows the US economy's future.